Management Accounting and Contribution Margin Essay

Submitted By thutran307
Words: 708
Pages: 3

Part A:
1. Financial and management accounting and difference
Financial vs. managerial accounting
Management accountability is the manager’s responsibility to the various stakeholders of the company
To earn the stakeholders’ trust, managers provide information about their decisions and the results of those decisions
Management accountability requires two forms of accounting, namely financial accounting for external reporting and managerial (or management) accounting for internal planning and control

2. Budgets (financial statement, such as income statement, balance sheet, cash of flow)
3. Accounting principles
Accrual versus cash-basis accounting
Accrual accounting records the effect of each transaction as it occurs
Cash-basis accounting records only cash receipts and cash payments. It ignores receivables, payables and other items
In accrual accounting, revenues are recorded when earned, which is not necessarily in the same accounting period as when the corresponding cash is received

4. How to prepare financial statement

Part B:
1. Cost volume profit analysis- calculate breakeven point, contribution margin, fix cost, variable cost, margin cost, net profit
High–low method to separate fixed costs from variable costs
STEP 1: Calculate the variable cost per unit
Variable cost per unit = Change in total cost ÷ Change in volume of activity
STEP 2: Calculate the total fixed cost
Total fixed cost = Total mixed cost – Total variable cost
STEP 3: Create and use an equation to show the behaviour of a mixed cost
Total mixed cost = (Variable cost per unit × number of units) + Total fixed costs
The breakeven point is the sales level at which profit is zero: total revenues equal total costs (expenses)
Sales below the breakeven point result in a loss
Sales above breakeven point provide a profit
The income statement approach

The contribution margin approach: a shortcut

Sales revenue
– Variable costs
= Contribution margin
– Fixed costs
= Profit
The contribution margin ratio is the ratio of contribution margin to sales revenue
Contribution margin ratio = Contribution margin / Sales revenue
Breakeven sales in dollars = Fixed costs / Contribution margin ratio
Target profit is the profit that results when sales revenue minus variable costs and minus fixed costs equals management’s profit goal
Target sales in dollars = (Fixed costs + Profit) / Contribution margin ratio
The margin of safety is the excess of expected sales over breakeven sales

2. Adjusting entries, transaction, journalise. List of accounts- classify A, L, E, noncurrent assets. Financial statement- given information and accounts- understand them how to prepare- classify the accounts
An asset is a resource controlled by an entity as a result of past events that is expected to provide future economic benefits to the entity in the future
Accounts receivable
Bills receivable
Prepaid expenses
Plant and equipment

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources